annenberg media ♪ st. a frustrated congress wanted to measure the depths of the great depression. as the u.s. entered world war ii, how did a system of accounting become the key to building the american arsenal? by 1970, america was uncovering the negative effects of pollution. should we measure these hidden costs of economic growth? most of us decide how well we're doing economically by what we can afford to buy. can we calculate a nation's economic well-being by adding up those individual measurements? can we compare national figures over time to determine if our economy is making progress? u.s. economic growth-- what is the gross national product? with economic analyst richard gill,
known as gnp. when the united states faced its worst economic crisis, the great depression, no such measuring tool existed, until this report went to the senate. copies of national income, 1929-1932 are scarce today, but back in 1934, it was very popular. 4,500 copies were sold in 8 months. the report was made by a team from the department of commerce when congress demanded more information. what was the great depression costing the american economy? led in part by the auto industry, the economy grew rapidly in the 1920s, generating more jobs, more income, and more free time. as long as the factories were humming, there was little concern about how well the nation was doing economically.
but when the bottom dropped out in 1929, congress wanted to find out how bad things actually were. as lawmakers passed new deal programs to end the depression, senator robert lafollette wanted to measure the nation's economy. the greatest economic crisis in our history is a grave national emergency, which makes it imperative that we fight the depression on all fronts. congress must formulate a sound program to this end. lafollette's senate resolution directed the commerce department to estimate national income for the three previous years. dr. carol carson has studied the developments of national income accounts during the depression. you could look down your block and see that people were unemployed, but they didn't know what was happening nationwide.
they were after aggregate statistics. simon kuznets was called in to direct the government study. he'd been working on income estimates for the national bureau of economic research. the lack of information about the economy was, in kuznets' words, "a scandal." the data were "neither fish nor flesh nor even red herring." kuznets found he would be working with economist robert nathan, one of his former students. he had me measuring things for which we didn't have direct data. we never had a service census, a retail census, or a construction census. the result was, there were a lot of gaps. that made it tough. but conceptually, simon gave it a degree of depth and, measurementwise,
a degree of reality that never had prevailed before. one of kuznets' basic concepts was to limit measurements to the marketplace. the amount people paid for goods and services measured consumption. the money spent on new production facilities and equipment gave a total for investments. the problem was to avoid double counting as payments flowed through the economic system. take an automobile. the iron mine operator gets income. the steel mill owner gets income. the manufacturer gets income. to avoid the inaccuracies of counting the same money three times, kuznets decided to use only final sales, in this case, the amount paid for the automobile at the dealer's. the value added along the way is found
by deducting the cost of the finished steel from the amount paid for the car. not all the nation's work is performed on assembly lines. up to 1/4 of the work in the economy is at home. kuznets excluded cooking, cleaning, and child care provided by housewives because it was too hard to measure and because of the kind of work it represented. he was shrewd. he didn't say just housewives. he said housewives' and other family members' services. he considered that part of the family rather than part of market production. his emphasis was on market production, so he felt that on that basis it could be excluded. also, he recognized the difficulty of estimating housewife services.
illegal activities were also excluded-- earnings from bootleg whiskey, drugs, and other criminal acts. this was also hard to estimate, but kuznets had another reason. illegal activities were excluded largely because he had an orientation that wanted to measure the goods in society. and he felt that this was not a good, but a bad. he wanted to measure services. illegal activities were considered a disservice. the fact that there were laws against certain activities were what he used as criterion for deciding what was good or bad or a service or a disservice. goods and services exchanged or bartered are excluded because they cannot be measured. kuznets included only products and services
paid for with money. kuznets spent a year working with government departments and private agencies. on january 4, 1934, the report was turned in. the nation had its most comprehensive economic measure. it revealed bad news. national income had fallen more than $40 billion since 1929. unemployment had increased sevenfold. 12 million people lost their jobs in three years. in the future, this concept would be renamed the gross national product. when adjusted for inflation, real gnp accurately measured the growth in the volume of the economy's production. 37 years later, kuznets was honored for work in economics with the nobel prize. he was cited for giving quantitative precision
to economic entities. today, the gross national product is the ultimate benchmark that measures the expansion and contraction of our multitrillion-dollar national economy. it covers everything we make and sell. it's used by bankers, brokers, and government officials. but how can anything so large and complex be made simple enough to be useful? we asked economic analyst richard gill. gnp is not a simple concept. yet it's extremely important for the area of macroeconomics. consideration of this concept brings out the basic equivalence of production and income, the cornerstone of much macroeconomic analysis. in a simple economy, we can describe economic transactions by means of what economists call
the circular flow. we have businesses here producing goods and services--gnp-- and selling them to consumers. we call them households. this is the upper loop. below, these same households sell their services-- their labor, for example-- to businesses who use these services to create goods and commodities. businesses pay households for labor and other services, creating a flow of income to the households. households use this income to buy goods that businesses have produced. these two flows are basically equal. what is the source of the real income of the economy? the goods that the economy produces. kuznets' studies illuminated the structure of the economy, but also they did more. imagine trying to plan a major war effort
without knowing the size of the real gnp that your economy is producing. as the nation prepared for world war ii, this was no academic question. the militarists of berlin and tokyo started this war, but the massed, angered forces of common humanity will finish it. january 6, 1942. president franklin roosevelt is giving the country its marching orders. the success of those orders in winning world war ii depended on the american economy. for months, the issue of how to prepare for war without actually fighting swung back and forth from congress to the white house. economists were trying to answer the critical question, how much could the economy produce
and how fast? german armies moved through europe in 1940, pushing allied forces into the sea at dunkirk. fdr took only tentative steps because of pressures to keep america out of war. in 1940, congress agreed to only token increases in defense production. roosevelt waited until after the presidential election to make his move. on december 29th, he called for a lend-lease program to aid the allies and $1 billion for arms production. we must be the great arsenal of democracy. for us, this is an emergency as serious as war itself. allied losses in europe mounted. plans for american aid increased. special envoys were dispatched to london and moscow to discuss war materials.
at home, mobilization committees were set up, bringing together business and labor. robert nathan, the chief economic planner for the arsenal of democracy, recalls that the first problem was convincing depressed industries to expand. the steel industry, with great impact, said, "you're silly." we were down to 15% to 20% of our capacity utilization for some years during the depression. i don't think we would have convinced them if we hadn't had the gnp to demonstrate what a fully employed economy would accomplish. plants began shifting toward munitions and liberty ships were being designed. another capacity had to be measured and planned for-- civilian needs. it was important to know how much could be devoted to the war
without jeopardizing civilian supplies. if you didn't put it into civilians, people wouldn't be alive, and who would produce the products? an awful lot had to go to civilians. as economists made estimates, roosevelt and churchill met. the meeting in 1940 is known for the atlantic charter of rights for free people. it was also the culmination of months of bargaining over what war materials the u.s. would supply. roosevelt asked the army, navy, and air force to estimate the costs of an all-out war. their total for the next two years--$150 billion, almost double the 1939 gross national product. nathan next evaluated the military's production needs. he started by breaking out the key sectors
from the national income and production accounts. we knew steel would be a limiting factor for tanks, ships, and big guns. how much steel was involved in these? we translated airplanes mainly into aluminum because you couldn't build airplanes without aluminum. we translated ammunition into copper. we had the key elements. we realized very soon we were going to build factories to process more steel than we had. you'd have fabricating plants that weren't being used. more serious, you wouldn't have any end products. you'd have wheels over here and generators over there. airplanes with no propellers. that's right. in late fall of 1941, nathan and his team sent their numbers to roosevelt as the debate continued over production goals.
roosevelt was using them to study american and allied military demands when the japanese attacked pearl harbor. the united states was at war. the ability to convert the american economy using the gnp information would be critical for our survival. our war program for the coming fiscal year will cost $56 billion or, in other words, more than half of the estimated annual national income. we shall produce 60,000 planes. we shall produce 45,000 tanks. we shall produce 55,000 anti-aircraft guns. we must convert every plant and tool
to war production. when roosevelt led the country into world war ii, he depended heavily on the gnp framework to predict our military strength. the economy exploded during those four years. 17 million new jobs were created. the index of industrial production doubled. the gnp grew $75 billion. richard gill points out that estimates of gnp were helpful during the war. without knowing our real gnp, we could not have judged how much war production was possible. we needed to know how many goods would be left over for civilian consumption and what taxes the government would have to levy. look at our circular flow again. production normally flows from businesses to households
who pay for these goods with incomes generated by that production. now the government steps in, spending half our gnp for war production. suddenly there's a problem. consumers still have big incomes, but few goods come to them. knowing what these numbers are, one can estimate how much purchasing power the government has to drain away from the civilian economy so that we wouldn't face a terribly inflationary situation. gnp figures were useful during the war, as they have been ever since. that doesn't mean they give a complete picture of the progress of our economy. the former head of nasa said, "on the way to the moon, we discovered earth." that discovery drew national attention. in april of 1970, people protested
against pollution from automobiles and factories, chemical poisoning from pesticides, the trash of a throwaway society, and ultimately, the idea that bigger is better. the originator of earth day, former senator gaylord nelson, recalls why so many people got involved. there was a growing public awareness that our environment was being degraded in ways that affected the quality of the lives of the people. they wanted something done about it. that's why the response to earth day, i think, was so great. an estimated 20 million people participated in that event. it may have been the largest planned event in world history. as a consequence, it got enormous attention. political figures who had thought of environmental and conservation issues
as the elite concerns of a few animal lovers suddenly recognized this was an important constituency. the protesters who gathered that day called into question a key ingredient of the american dream, growth that leads to prosperity. were they leftovers from the sixties, or had they discovered a flaw in the way we measure economic success? following world war ii, u.s. economic growth was the envy of the world. americans worked and consumed at record levels. from 1950 to 1970, americans built and bought some 60 million new homes. americans built and bought 141 million new cars, which they drove on new roads. american farmers increased production by 45%. from 1950 to 1970,
the gross national product more than tripled to $977 billion. real income, or purchasing power per person, rose by 68%. during this period, growth created 25 million new jobs. the nation built new schools and trained new teachers. the average american, who had grade school education in 1940, now had completed high school. americans were making more money and working fewer hours. they enjoyed the good life. for most people, the benefits of economic growth were there for the taking. but by the end of the 1960s, hidden costs appeared. automobiles dumped 230,000 tons of carbon monoxide a day into the air. los angeles air was hazardous most of the year. oil spills in the santa barbara channel
fouled miles of beaches. pesticide spraying was threatening many species of birds. pesticide spills killed some 15 million fish in arkansas. three million acres of hillsides lay stripped bare for their coal. and in cleveland, the local industrial sewer, the cuyahoga river, caught fire. environmentalists had found a loophole in the gnp. the gnp measures goods and services traded, for example, scrubbers used to clean sulfur emissions. clean air isn't bought or sold, so it's not counted. if sulfur is not cleaned up, the resulting pollution is not subtracted. gnp is not reduced. gnp fails to take into account environmental values. if we produce a lot of goods and services,
if we use up machinery, that's deducted depreciation from net national product. but if we dirty the atmosphere, if we cause more houses to have to be painted, that deterioration is not taken into account. if it makes more people sick and they go to more doctors, that increases gnp, because doctors' services are part of gnp. by now i think that most national income statisticians concede that we can never produce a measure of aggregate economic welfare in the sense of well-being. for one thing, it's hard to add together people's satisfactions. and if you're looking primarily at gnp as a production measure, you don't need that additional kind of a series.
a country can't be rich and poor in resources or access to them because resources determine the standard of living, the quality of life. if you dissipate them and call it profit, some generation loses all of its capital resources. we will have left them a debt they can't pay. what's better for society, increased production or a cleaner environment? this ethical, moral, or economic question points out the difference between measuring growth and measuring welfare. economic analyst richard gill explains. some say an economist, like a cynic, knows the price of everything and the value of nothing. economists, when they measure gnp and its growth over time, tend to concentrate on goods and services that had market prices,
numbers that can be added, subtracted, and multiplied. the more intangible benefits and costs of growth, however much they affect our economic welfare, are much harder to assess. it isn't just an economist's problem. we all have different evaluations of the desirablity or undesirability of economic growth. some people genuinely like the buzz and bustle of a growing economy. others prefer stability and tranquility. who is to say which preference is correct? still, these gnp numbers tell a remarkable story. the curve of real u.s. gnp has fluctuated, but basically, it has ascended dramatically over the past century. the total production of goods and services rose 20 times or more during this period.
what has this meant to us? more pollution, noise, congestion, anxiety. all these and more, without question. but also longer life expectancies, more food, clothing, shelter, an enormous increase in leisure time, and added resources for correcting some unfortunate side effects of growth itself. gnp does not measure economic welfare, but it is certainly worth measuring in its own right. our hats are off to the scholars who made such measurements possible. the gnp began developing over 50 years ago as economists tried to explain swings of the business cycle. they needed a quantitative measure of how nations grow and income is created. we've seen its development as a planning tool in times of crisis.
today, when economists and government officials try to manage the economy, changes in the gross national product tell them how well their decisions are working. i'm david schoumacher for economics usa. captioning is made possible by the annenberg/cpb project captioning performed by the national captioning institute, inc. captions copyright 1986 educational film center